Kraft, which makes everything from Philadelphia to Kool-Aid and of course its eponymous cheese, is being snaffled up by Brazilian private equity group 3G via a Warren Buffett-supported merger with beans and ketchup maker Heinz. And it may be near-perfect timing for the American food giant, as it struggles with US consumers finally grasping the concept of healthy, or at least different, food.
Kraft’s shareholders are getting 49% of the combined business, which will be the third largest food and drink company in the US and the fifth largest in the world. They’re also landing a $9.7bn (£bn) special dividend, worth 27% of Kraft’s $36.1bn market cap before rumours of the deal leaked out last night and sent shares up more than 15% (they're now up 25% after the official announcement).
The $16.50-per-share sweetener is being co-funded by Buffett’s Berkshire Hathaway and 3G, which is headed up by Brazil’s richest man Jorge Paulo Lemann and has been on a mega acquisition spree of late. It bought Burger King for $3.3bn in 2010, which in turn swallowed Canadian coffee chain Tim Hortons for $11.4bn last year with Buffett’s help. 3G also teamed up with the Sage of Omaha in 2013 to buy Heinz for $23.2bn. So just the latest in a fast, slickly-executed big food acquisition, free of the political hand-wringing that would no doubt take place on our side of the Atlantic.
‘This is my kind of transaction, uniting two world-class organizations and delivering shareholder value,’ Buffett said. ‘I'm excited by the opportunities for what this new combined organization will achieve.’
Kraft is of course infamous in the UK for its hostile takeover of Cadbury, after which it promptly broke a promise not to shut the much-beloved brand’s Somerset factory. Cadbury has since been spun out of Kraft into Mondelez, along with Toblerone, Trident chewing gum and Oreo cookies.
Kraft, which focussed on American processed foods, has actually outperformed its international snacking ex since their 2012 split. But lately it has looked rather bloated.
Source: Yahoo Finance
Its net revenues slipped 0.1% in 2014, with beverages down 2% and meals and desserts (including such delights as mac ‘n’ cheese in a box) falling 6.5%. Chief executive John Cahill cleared out his senior team just last month, clearly in preparation for the upcoming deal, ditching his chief financial and marketing officers.
So why the slide? As the FT’s Gary Silverman sets out in this excellent ‘Craft versus Kraft’ piece, all-American giants like Kraft and Coca-Cola are starting to struggle as younger consumers turn their nose up at the same old processed fare in favour of something a bit healthier and different. Immigrants, meanwhile, are increasingly buying brands and shopping at stores that specifically cater to them. These same trends have also hit fast-food chains like McDonald’s hard.
The Krafts, Kellogs and KFCs of America need to fix up and look sharp, then, if they’re going to sate these changing tastes. And the embrace of private equity, away from the glare of the stock market, is one sensible way to go about it.
Don’t count these leviathans out though – unless you fancy betting against Buffett, an avowed fan of Cherry Coke and cheese burgers at the grand old age of 84. They do say you are what you eat after all.